Investment fees || SPP

[Music] Hi, I’m Bonnie from the Saskatchewan Pension Plan and welcome again to our series on Investment Basics. Today we’re going to talk about fees. Let’s begin this segment by stating; regardless of the type of investment you make, whether it’s in a GIC or a mutual fund, you are paying fees. In the case of a GIC, the interest rate you receive is net of the fees you are paying. When you purchase a mutual fund the advisor you work with must tell you how much you are paying for fund management, sales and other fees. This information is disclosed on the Fund Fact sheet. Investment fees do add up and will affect your savings, so it’s important to pay attention and understand these costs – and investment advisors must tell you this information. So what are fund management fees and why are they important to you as an investor? When you invest in a fund you are buying the expertise of professionals who will select and manage the investment funds, and in return you will indirectly pay the fee for this service. The management fee encompasses all direct expenses incurred in managing the investments such as: hiring a portfolio manager, asset mix optimization, and risk management. A fund also incurs operating fees which include: marketing costs, record-keeping, custodial fees, legal fees, auditing and other administrative costs. While these fees are not directly involved with making the investment decisions, they are required to ensure the fund is run correctly. Together, the management fees and operating fees make up the Management Expense ratio or MER. The MER is a broad measure of how expensive the fund is to the investor. They are paid by the fund and are expressed as an annual percentage of the average net asset value of the fund. In general, index and money market funds charge the lowest management fees because they require little research or active management, while equity funds and particularly foreign equity funds will charge the highest. Managers of equity funds must continuously monitor their investments, and managers of foreign equity funds generally require more research in analyzing stock and the markets they want to invest in. If you are comparing the MER of different funds, it’s important to make sure that you’re comparing the same type of fund. A small difference in the MER can make a big difference over time. For example, if you make a deposit of $5,000 into a fund that earns a gross return of 9% a year, compounded annually, and has an MER of 1%, at the end of 30 years you’ll have a fund worth $50,313. If the MER is 2%, your fund will only be worth $38,061 – a difference of over $12,252. Having a clear understanding of the fees charged by a fund is a significant component to making an informed investment decision. Keeping this cost down is one of the secrets to building wealth over the long run. If you have questions about SPP’s MER, contact the number on the screen or visit us at our website. Thanks so much for watching and join us next time. [Music]

Paul Whisler

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